Frosty the Joe Man 02-01-2011

Cusick's Corner
This is Frosty the Joe Man reporting on “Snowmageddon 2011” and being the contrarian -- I am a seller of firewood. With that said, this may actually be the worst snowstorm in Chicago since ‘67 & ‘99 but I digress from a hot market. Right now we are at levels that we have not seen in over 3 years, with the Dow Industrials over 12K, SPX over 1300 and the NDX 2300. The options trade has been geared towards spread trading, some larger trades today include: SPY Feb 130-121 bear put spreads were purchased as a potential hedge (see Bearish Flow) & USO (Oil ETF) April 50-53 bull call spreads were purchased to potentially take advantage of a short-term spike if the situation in Egypt escalates and Wednesday's Inventories data comes out bullish. I point these transactions out to show how you can participate in the market when you have a conviction either bullish or bearish, while mitigating the risk of just buying options based on that conviction. See you After Hours.

Stocks are rallying around earnings news and economic data Tuesday. Pfizer (PFE) gained 5.8 percent and is leading the Dow Jones Industrial Average higher after reporting fourth quarter profits that topped Street estimates. BP, Archer Daniels Midland (ADM), and McKesson (MCK) are also up on earnings news. Meanwhile, the day's economic data included the ISM Manufacturing Index, which showed improvement to 60.8 in January, from 58.5 in December and significantly better from what economists had expected (58.4). Stocks rallied around the data and the Dow Jones Industrial Average is up 120 points midday. The tech-heavy NASDAQ added 51 and has now recovered almost all of Friday's 62-point loss. Trading is very active, with 5.9 million calls and 4.6 puts traded through 12:30pm ET.

Bullish Flow
After a two-day 7.4 percent run higher, the US Oil Fund (USO) is flat at $38.61 midday Tuesday. A noteworthy options trade is in the January 2012s. In this “risk-reversal”, the strategist sold a block of 5,000 January 35 puts at $2.85 and bought 5,000 January 45 calls at $2.15. They collected 70 cents on the combination. It has traded 12,000X total and appears to be a bullish play on oil through 2012. USO is an exchange-traded fund that tracks crude oil through futures contracts. By selling $35 puts (to buy the $45 calls), the strategist is taking a bullish position calls and also saying that they are willing to buy (have put) USO shares at $35 through the January 2012 expiration.

Homebuilder Hovnanian (HOV) shares are trading up 29 cents to $4.71 and options volume is running 20X the average daily, being driven by put selling. The focus is on the January $2.5 puts. One investor sold 12,000 at 25 cents. Another 8,000 were later sold, also at 25 cents. Volume is now 20,003 contracts, compared to 7,398 in open interest. These put sellers appear to be opening new positions and are probably looking for shares to hold above $2.5 through January 2012. If not, they could face assignment and be asked to buy shares (20000X100) at $2.50 each.

Bearish Flow
The biggest trades so far today are in the SPDR 500 Trust (SPY). The so-called Spyders are trading up $2.11 to $130.79 and their best levels since September 2008. Meanwhile, in options action, a block of 50,000 February 130 puts traded at $1.62 and a block of 50,000 February 121 puts traded at 24 cents. Both traded this morning on the CBOE and were part of a spread purchase. The investor paid $1.38 for the spread, according to a source on the CBOE, and is probably setting a short-term hedge. February options expire in two and half weeks and (excluding commissions) this spread pays off if shares fall below $128.62 through the expiration.

Riverbed Technologies (RVBD) is trading down and options volume is up after being mentioned negatively at a Stansberry Research newsletter (per Fly on the Wall). Shares are down 16 cents to $35.71 and options volume is 2.5X the average daily, with 51,000 puts and 6,050 calls traded in the name. March 34 puts are the most actives. More than 43,000 have changed hands so far.

Unusual Volume
Pfizer (PFE) options volume is running 5.5X the average daily, with 443,000 contracts traded and call volume accounting for 86 percent of the volume, according to data from WhatsTrading.com.

Baidu.com (BIDU) options volume is 2X the average daily, with 155,000 contracts traded and call volume representing for 58 percent of the activity.

Genzyme (GENZ) options volume is running 2X the average daily, with 62,000 contracts traded and call volume accounting for 65 percent of the activity.

Increasing options activity is also being seen in Riverbed Tech (RVBD), UPS, and Archer Daniels Midland (ADM).

Implied Volatility Mover
The CBOE Volatility Index (.VIX) is easing. The market's “fear gauge” closed above 20 Friday, but is down 2.05 to 17.48 midday Tuesday. The S&P 500 has rallied 21.7 points with help from better than expected stock news and a strong reading on manufacturing. GM and Ford (F) are also trading higher on monthly auto and truck sales numbers. The day's domestic news seems to have overshadowed recent concerns about civil unrest in the Arab world. VIX has now retraced two-thirds of the 3.89-point spike on Friday.